The Story of a Bubble

Joseph Stiglitz
Joseph Stiglitz; drawing by David Levine

1.

For our purposes, the “fabulous Nineties” can be bracketed by two major political events. The fall of the Berlin Wall on November 9, 1989, marked the end of the cold war and the beginning of a period of geopolitical optimism. The Soviet empire disintegrated, the great powers unified Germany, and Europe began its movement to a common currency. The end of the period came on September 11, 2001, when the age of terrorism began, and the security anxieties of the cold war were replaced by altogether different ones.

Economic history seldom has the dramatic discontinuities of political events, and changes in economic fortunes often have complex roots. Good economic history requires not only a sound understanding of how the economy functions but also attention to institutional details, such as how monetary and fiscal policy decisions are made, as well as the impact of events such as the attacks of September 11, 2001, or the economic impact of the war in Iraq and its aftermath.

When we interpret the Nineties, it is natural for us to rely on histories written by economists who witnessed the events firsthand. Two books that will serve as excellent sources for this period are The Fabulous Decade, a careful analysis of national economic policy first published in 2001 by Alan Blinder and Janet Yellen, and The Roaring Nineties, a comprehensive review of the last decade by Joseph Stiglitz.1

All three authors are distinguished academic economists who worked in different government agencies during the 1990s. Alan Blinder served in President Clinton’s Council of Economic Advisers (CEA) in 1993 and 1994; he then became a governor and vice-chairman of the Federal Reserve from 1994 until 1996, when he returned to Princeton University. Janet Yellen was a governor of the Federal Reserve from 1994 until 1997, and she then served as chair of the CEA from 1997 to 1999; she is now at the University of California at Berkeley.

The book by Blinder and Yellen has a relatively narrow focus. It seeks to explain why the 1990s were so successful from a macroeconomic point of view—one that takes into account the behavior of the major economic aggregates such as output, unemployment, and productivity. Their analysis proceeds by considering economic statistics for the period; by using two different econometric models to assess the effects of economic shocks during the 1990s on both consumption and investment; and by drawing on detailed transcripts of Federal Reserve meetings.

Most economists at the CEA and the Federal Reserve are highly qualified, but Joseph Stiglitz is unique in being the only Nobel Prize winner who was also the chief economist to the President of the United States, whom he served from 1995 to 1997. Stiglitz then served as chief economist of the World Bank between 1997 and 2000. His academic writings have emphasized how “asymmetric information”—situations where one side of a transaction has better information…


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